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Federal mortgage standards tightened

The government said Friday it is implementing tighter lending standards for mortgages backed by the Federal Housing Administration in a move that one lending group charged will reduce home sales by as much as 200,000 annually. The new rules will require persons financing their purchases with FHA-backed mortgages to pay substantially higher closing costs and for the first time to make annual payments for mortgage insurance.

The FHA said the new requirements, which take effect July 1, were required to shore up a mortgage program that is incurring losses at a rate of $200-million per year.

However, housing groups contended that the new rules go much further than intended by Congress and come at a time when the housing industry is struggling to emerge from a two-year slump in sales.

The Mortgage Bankers Association estimated that the new rules could reduce annual home sales by between 100,000 and 200,000 annually, enough to abort any recovery in the housing industry.

"These new regulations could not have come at a worse time," MBA executive vice president Warren Lasko said. "These changes will lock out thousands of families who will no longer be able to afford a home."

The FHA said its review estimated only about 20,000 potential buyers would be prevented from purchasing homes by the more stringent standards.

One of the new requirements going into effect July 1 will place a limit of 57 percent on the amount of closing costs that can be financed in the mortgage. Now, up to 100 percent of closing costs can be financed.

The effect of that change will mean that a homebuyer taking out a $100,000 FHA loan and facing closing costs of $2,500 will have to pay about $1,000 of the closing costs out of pocket rather than financing the full amount as part of the mortgage.

In addition to the increased down-payment costs, FHA homebuyers will have to pay a new annual mortgage insurance premium of 0.5 percent. Previously, they had been required to pay only an up-front premium of 3.8 percent.